Amortization is the spreading out over time of payments or expenses, depending on whether the amortization is calculated for either a loan or an asset. The asset in question may be tangible or intangible.
In lending, it refers to the distribution of payments over time, as determined by an amortization schedule. Each payment will include principal and interest, with most of the payment usually going towards interest, at the beginning of the payment program. With each payment, an increasing percentage of the established payment amount is directed towards the loan’s principal, instead.
For tangible assets, amortization is similar to depreciation and the method depends on the expected useful life of the asset. Depreciation measures the decrease in value or utility over time. Amortization is to allocate the depreciable value amount over the expected life of the item, so a portion of the initial cost is gradually written off as an expense.The cost of a short-term tangible asset can be deducted as a business expense in one go, as it is used up before the next tax calculation is due. For long-term tangible assets (utility estimated to be more than one year), rather than writing off the entire amount as an expense in the year it was purchased, the cost can be amortized by gradually writing it off over the course of its anticipated useful life, as Amortization per se focuses on capitalizing the amount of the cost over the asset’s projected useful life.
The term tends to apply more to intangible assets. This category refers to things like corporate intellectual property (patents, trademarks, business methodologies, etc.), the company brand name (classified as an indefinite intangible asset), a franchise agreement (classified as a definite intangible asset, as the agreement does have an established end date) and so on. While the value or the lengths of utility of such assets is not easily calculated, the IRS does require that businesses amortize the cost of intangibles. Therefore, if a business acquires a patent, it will have to write that cost off incrementally over a number of years.
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